NATURE OF BUSINESS, BASIS OF PRESENTATION |
9 Months Ended |
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Sep. 30, 2011 | |
| NATURE OF BUSINESS, BASIS OF PRESENTATION |
1. NATURE OF
BUSINESS, BASIS OF PRESENTATION
Novelos
Therapeutics, Inc. (“Novelos” or the
“Company”) is a pharmaceutical company developing
compounds for the treatment and diagnosis of cancer. On
April 8, 2011, Novelos completed a business combination with
Cellectar, Inc. (“Cellectar”), a privately held
Wisconsin corporation that designed and developed products to
detect, treat and monitor a wide variety of human cancers, and Cell
Acquisition Corp. (the “Merger Subsidiary”), a
Wisconsin corporation and a wholly owned subsidiary of
Novelos. Pursuant to the transaction Cellectar was
merged into the Merger Subsidiary (the “Acquisition”,
see Note 3). References in these consolidated financial
statements and notes to “Cellectar” relate to the
activities and financial information of Cellectar prior to the
Acquisition, references to “Novelos” relate to the
activities and financial information of Novelos prior to the
Acquisition and references to “the Company” or
“we” or “us” or “our” relate to
the activities and obligations of the combined Company following
the Acquisition.
Immediately
prior to the Acquisition, Novelos completed a 1-for-153 reverse
split of its common stock (the “April Reverse
Split”). Novelos then issued to the shareholders
of Cellectar at that date 17,001,596 shares of its common stock as
consideration for the Acquisition, representing a ratio of 0.8435
shares of Novelos common stock in exchange for one share of
Cellectar common stock (the “Exchange Ratio”) as set
forth in the Agreement and Plan of Merger (the Merger
Agreement”) dated April 8, 2011. The shares issued
to Cellectar shareholders in the Acquisition constituted
approximately 85% of Novelos’ outstanding common stock after
giving effect to the Acquisition. Upon the closing of
the Acquisition, the Company completed the private placement of
6,846,537 shares of its common stock and warrants to purchase an
additional 6,846,537 shares of its common stock for gross proceeds
of approximately $5,135,000.
Accounting
principles generally accepted in the United States require that a
company whose security holders retain the majority voting interest
in the combined business be treated as the acquirer for financial
reporting purposes. Accordingly, the Acquisition was
accounted for as a reverse acquisition whereby Cellectar was
treated as the acquirer for accounting and financial reporting
purposes. The financial statements presented herein as
of December 31, 2010 and for the nine months ended September 30,
2010 represent the historical financial information of Cellectar,
except for the capital structure, which represents the historical
amounts of Cellectar, retroactively adjusted to reflect the legal
capital structure of Novelos by applying the Exchange
Ratio. On April 8, 2011, Cellectar was merged into the
Merger Subsidiary, a wholly owned subsidiary of Novelos; as such
the financial statements presented herein as of and for the nine
months ended September 30, 2011 include the historical results of
Cellectar from January 1, 2011 through April 8, 2011, except for
the capital structure which has been retroactively restated as
described above, and include the consolidated results of the
combined company from April 9, 2011 through September 30,
2011. All per-share amounts and outstanding shares,
including all common stock equivalents, and stock options, have
been retroactively restated in these financial statements and notes
for all periods presented to reflect the capital structure of
Novelos by applying the Exchange Ratio. The number of
authorized shares of common stock disclosed on the balance sheet
(150,000,000) represents the number of authorized shares of Novelos
common stock following the Acquisition. Additionally, on
the accompanying balance sheets the aggregate par value of the
issued common stock was reduced to reflect the $0.00001 par value
of Novelos common stock associated with the shares of Cellectar
common stock adjusted for the Exchange Ratio and the difference was
reclassified to additional paid-in capital.
As
a result of the Acquisition, the Company has implemented a revised
business plan focused on the development of the Cellectar
compounds. Development of Novelos’ other compounds
(NOV-002 and NOV-205) has been suspended. The Company
conducts its operations from Cellectar’s headquarters in
Madison, WI and the Company’s executive offices are in
Newton, MA.
The
Company is subject to a number of risks similar to those of other
small biopharmaceutical companies. Principal among these risks are
dependence on key individuals, competition from substitute products
and larger companies, the successful development and marketing of
its products in a highly regulated environment and the need to
obtain additional financing necessary to fund future
operations.
The
accompanying consolidated financial statements have been prepared
on a basis that assumes that the Company will continue as a going
concern and that contemplates the continuity of operations,
realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company has
incurred losses since inception in devoting substantially all of
its efforts toward research and development and has an accumulated
deficit of $29,514,506 at September 30, 2011. During the nine
months ended September 30, 2011, the Company generated a net loss
of $5,469,502 and the Company expects that it will continue to
generate operating losses for the foreseeable
future. The Company believes that its cash on hand is
adequate to fund operations until the end of 2011. The
Company’s ability to execute its operating plan beyond that
time depends on its ability to obtain additional funding via the
sale of equity and/or debt securities, a strategic transaction or
otherwise. The Company plans to continue to actively
pursue financing alternatives, but there can be no assurance that
it will obtain the necessary funding. The accompanying
consolidated financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
The
accompanying balance sheet as of December 31, 2010 has been derived
from audited financial statements. The accompanying
unaudited consolidated balance sheet as of September 30, 2011, the
consolidated statements of operations for the three and nine months
ended September 30, 2011 and 2010 and the cumulative period
November 7, 2002 (date of inception) through September 30, 2011,
and the consolidated statements of cash flows for the nine months
ended September 30, 2011 and 2010 and the cumulative period
November 7, 2002 (date of inception) through September 30, 2011 and
the related interim information contained within the notes to the
consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange
Commission (“SEC”) for interim financial information.
Accordingly, they do not include all of the information and the
notes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, the
unaudited interim consolidated financial statements reflect all
adjustments, consisting of normal and recurring adjustments,
necessary for the fair presentation of the Company’s
consolidated financial position at September 30, 2011 and
consolidated results of its operations and its cash flows for the
three and nine months ended September 30, 2011 and 2010 and the
period from November 7, 2002 (inception) to September 30, 2011. The
results for the three and nine months ended September 30, 2011 are
not necessarily indicative of future results.
These
unaudited consolidated financial statements should be read in
conjunction with the audited financial statements and related notes
thereto included in the Company’s Form 8-K/A, which was filed
with the SEC on June 14, 2011.
Fair Value of Financial Instruments – Financial
instruments in the accompanying financial statements consist of
cash equivalents, accounts payable, convertible debt and long-term
obligations. The carrying amount of cash equivalents,
investments and accounts payable approximate their fair value due
to their short-term nature. The estimated fair value of
the convertible debt, determined on an as-converted basis including
conversion of accumulated unpaid interest, was approximately $0 and
$3,264,000 at September 30, 2011 and December 31, 2010,
respectively. The carrying value of long-term
obligations, including the current portion, approximates fair value
because the fixed interest rate approximates current market rate of
interest available in the market.
Derivative Instruments – The Company generally does
not use derivative instruments to hedge exposures to cash flow or
market risks. However, certain warrants to purchase
common stock that do not meet the requirements for classification
as equity, in accordance with the Derivatives and Hedging Topic of
the Financial Accounting Standards Board Accounting Standards
Codification (“FASB ASC”), are classified
as liabilities. In such instances, net-cash settlement
is assumed for financial reporting purposes, even when the terms of
the underlying contracts do not provide for a net-cash settlement.
These warrants are considered derivative instruments because the
agreements contain “down-round” provisions whereby the
number of shares for which the warrants are exercisable and/or the
exercise price of the warrants are subject to change in the event
of certain issuances of stock at prices below the then-effective
exercise price of the warrants. The number of shares
issuable under such warrants was 77,729 at September 30,
2011. The primary underlying risk exposure pertaining to
the warrants is the change in fair value of the underlying common
stock. Such financial instruments are initially recorded
at fair value with subsequent changes in fair value recorded as a
component of gain or loss on derivatives in each reporting
period. If these instruments subsequently meet the
requirements for equity classification, the Company reclassifies
the fair value to equity. At September 30, 2011, these
warrants represented the only outstanding derivative instruments
issued or held by the Company.
New Accounting Pronouncements
— In December 2010, the FASB issued
ASU No. 2010-29, Disclosures of Supplementary
Pro Forma Information for Business Combinations, which, if
comparative financial statements are presented, requires the
supplemental pro forma disclosure of revenue and earnings to be
presented as if the business combination had occurred at the
beginning of the comparable prior annual reporting period
only. This standard also expands the supplemental pro
forma disclosures required under FASB ASC Topic 850, Business Combinations,
to include a description of the nature and amount of material
nonrecurring pro forma adjustments directly attributable to the
business combination in the reported pro forma revenue and
earnings. This standard is effective for the Company for
any business combinations completed after January 1,
2011. The Company adopted the provisions of this
standard during the first quarter of 2011.
In
May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S.
Generally Accepted Accounting Principles (“GAAP”) and
International Financial Reporting Standards
(“IFRSs”). This standard updates
accounting guidance to clarify the measurement of fair value to
align the guidance and improve the comparability surrounding fair
value measurement within GAAP and IFRSs. The standard
also updates requirements for measuring fair value and expands the
required disclosures. The standard does not require
additional fair value measurements and was not intended to
establish valuation standards or affect valuation practices outside
of financial reporting. This standard will become
effective for the Company on January 1, 2012. The
Company does not expect that the adoption of this standard will
have a material impact when applied prospectively on the
Company’s financial statements or required
disclosures.
In
June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive
Income. This standard eliminates the current option to
report other comprehensive income and its components in the
statement of changes in equity. The standard is intended to enhance
comparability between entities that report under US GAAP and those
that report under IFRS, and to provide a more consistent method of
presenting non-owner transactions that affect an entity's
equity. Under the ASU, an entity can elect to present
items of net income and other comprehensive income in one
continuous statement, referred to as the statement of comprehensive
income, or in two separate, but consecutive,
statements. Each component of net income and each
component of other comprehensive income, together with totals for
comprehensive income and its two parts, net income and other
comprehensive income, would need to be displayed under either
alternative. The statement(s) would need to be presented
with equal prominence as the other primary financial
statements. The ASU does not change items that
constitute net income and other comprehensive income, when an item
of other comprehensive income must be reclassified to net income or
the earnings-per-share computation (which will continue to be based
on net income). The new US GAAP requirements are
effective for public entities as of the beginning of a fiscal year
that begins after December 15, 2011 and interim and annual periods
thereafter. Early adoption is permitted, but full
retrospective application is required under the accounting
standard. The Company does not expect that the adoption
of this standard will have a material impact on our results of
operations, cash flows, and financial position.
In
September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill
and Other (Topic 350) Testing Goodwill for
Impairment. This standard simplifies how an
entity tests goodwill for impairment and allows an entity to first
assess qualitative factors in determining whether it is more likely
than not that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary
to perform the two-step goodwill impairment test. This
standard is effective for entities as of the beginning of a fiscal
year that begins after December 15, 2011 and interim and annual
periods thereafter. Early adoption is
permitted. The Company does not expect the adoption of
this standard will have a material impact on our results of
operations, cash flows, and financial position.
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